Incentive Insights: Fine-Tuning Compensation Plans in Trying Times

Article |
Fri, 07/30/2010 - 23:10

Keeping the sales force upbeat and engaged during trying economic times must be a priority for companies across industries. The risk of corporate inaction is high—and while achieving this feat while keeping costs down may seem infeasible, it isn't.

According to a recent multi-industry survey conducted by ZS Associates, 50 percent of companies surveyed were able to alter their incentive compensation plans to improve sales performance without sacrificing fiscal responsibility. The 2009 Incentive Practices Research (IPR) study offers valuable guidelines for incentive plan adjustments that can help keep the sales force motivated. It also provides insight on how companies are successfully working to control costs without hurting sales force morale.

According to the IPR survey, many companies are adjusting salaries and quotas to control sales costs…but stop short of making wholesale pay cuts. More specifically, companies are doing the following:

1. Freezing, but not cutting, base salaries. Thirty-eight percent of survey participants indicated they are freezing base salaries, while 22 percent indicated that they are reducing the percentage hike in base salaries compared to prior years. Still, nobody seems to be cutting base salary—a shortsighted strategy that tends to backfire. Salespeople whose pay is cut lose motivation and are more likely to leave when the economy rebounds. This is a primary reason why sales management will often prefer reducing the size of their sales force to cutting individual salesperson pay.

2. Setting more realistic sales quotas. As many as one-third of survey participants are reducing their sales quotas in the current economic environment. This number is even higher in industries such as tech, where sales are more sensitive to fluctuations in the economy. To some, this approach may seem intuitive, but many companies refuse to reduce sales quotas regardless of the circumstance.

This reluctance often stems from one of two insistences: 1. that total quotas match the national forecast, without exception; or 2. a belief salespeople must "feel the pain" of the current economy, just like every other employee. And yet, several studies suggest unrealistic or unachievable quotas may actually decrease sales as compared to lower, more realistic quotas. This is because unreachable quotas make salespeople more likely to just give up on the current performance period and move on to the next one.

3. Freezing target incentives. Thirty-two percent of companies surveyed said they are keeping the target sales incentive the same as last year. Similar to freezing base salaries, companies view this as a prudent move to limit costs when total compensation levels are not rising and companies are not likely to lose their salespeople to competitors in the short term.

According to a parallel study conducted by ZS Associates and the Strategic Account Management Association, many salespeople say they are more satisfied with their job today than they were a year ago—despite the limits on their pay.

While many salespeople may simply be thankful to be employed in today's economy, companies shouldn't count on this goodwill to help them retain top talent forever. In order to keep their sales force motivated, companies would do well to make minor (albeit temporary) tweaks to their incentive plan to provide some short-term relief to salespeople without overhauling the entire incentive structure.

1. Shorten the performance period. Shortening the performance period from annual to quarterly reduces the impact of an errant forecast. This allows the company to better respond to volatile markets. For example, companies using an annual performance period today are forced to tie themselves to one economic prediction for an extended period of time, despite the fact there is no consensus on the future of the economy. A quarterly performance period allows companies to forecast as accurately as possible over a shorter period while retaining the flexibility to change if the initial forecast is wrong.

2. Reduce the threshold point below which no incentive is paid. If a company's policy does not allow any quota reductions below the overall sales forecast, even when it has become unachievable, it may make sense to lower the threshold to limit the percentage of salespeople left with no incentive payout.

Similarly, companies can lessen the downside risk in the IC plan to soften the blow. For example, they can increase the expected incentive payout when reps achieve 90 percent of their sales quota. Companies that reduce the threshold or downside risk of their incentive plan can reduce the plan's upside (temporarily) in a bid to balance sales force engagement with company fiscal responsibility.

Participating companies in the IPR survey were split down the middle on whether to make any changes to the incentive plan in light of the current economy. Some stood by their plan or made changes solely to cut costs. Others made changes to get more salespeople engaged in the incentive plan, assuming that an increase in sales force engagement will result in higher job satisfaction and morale and a corresponding increase in sales. Many others, however, made changes that tried to balance both objectives.

While it may be tough to determine the most appropriate course of action, the latter approach gives companies across industries the best chance of not only controlling costs, but also maintaining a productive sales force during these difficult economic times. Companies with the most engaged (and loyal) salespeople today will also be best prepared to succeed in the future.

Chad Albrecht is an associate principal with ZS Associates, a global management consulting firm specializing in sales and marketing consulting, capability building, and outsourcing. He can be reached at chad.albrecht@zsassociates.com.